Arizona is perhaps best known for its hot climate and natural beauty, but it’s developing a high profile for business as well. The state’s population is growing, as is its economy. On the downside, Arizona has higher costs than most states. If you’re considering starting a business in the Grand Canyon State, here’s what you need to know.
Negotiating the challenges and obligations entailed in launching a business can be confusing. A financial advisor can offer valuable advice.
Make a Business Plan
Careful planning precedes most successful business startups. And the first planning consideration is what to sell. Entrepreneurs naturally gravitate toward offering products and services that conform to their talents and interests.
The opportunities presented by the market are equally important considerations. Arizona has an economy typical of many states in that it’s dominated by services. In Arizona’s case, services for tourists and retirees are particularly important. It’s also the nation’s top producer of copper, a leading cotton grower and has a healthy manufacturing sector.
Marketing is the next key component of business planning. Any sales and marketing plan for a new business in Arizona will likely take into account the fact that the state’s population is heavily concentrated around Phoenix. Maricopa County, which includes Phoenix, Tucson and nearly all the rest of the state’s largest cities, contains more than 60 percent of the state’s 6.9 million population.
Staffing a new business is the next item to plan for. Arizona is better supplied with workers than most U.S. states. And it is also among the least-unionized states, providing new employers with flexibility in staffing.
Financing for small business startups tends to come primarily from founders’ savings. Investments from friends and family, venture capital, bank loans and crowdsourcing are also potential sources of capital.
In addition, Arizona’s state government provides a rich palette of incentives that can help with new business finances. Tax credits, exemptions, grants and other assistance are available for businesses that provide jobs, install energy-saving equipment, are located in economically disadvantaged areas and advance similar agendas.
Choose a Business Structure
The type of business structure chosen when first organizing a small business can have a significant influence on the level of risk borne by the founder as well as the long-term prospects for growth and attracting investors. Here are the major kinds of business entities to consider:
- Sole proprietorship: This simplest and most common structure offers no liability protection to owners. Sole proprietors may need to register with local authorities if operating under an assumed name. Most also need to register with state taxing authorities.
- Partnership: Partnerships are created when two or more people join to form a for-profit business. Like the sole proprietorship, a partnership provides little liability protection. Arizona partnerships may need to register with local authorities if operating under an assumed name. Most also need to register with state taxing authorities.
- Corporation: Corporations offer liability protection and make it easier to attract investors, at the cost of additional filing and regulatory burdens. There are two types of corporations, a C corporation and an S corporation. The latter type lets a company pass all profits directly to the owner(s), who therefore avoid double taxation. Corporations must file articles of incorporation with the Arizona Corporation Commission.
- Limited liability companies (LLCs): LLCs protect owners from liability similarly to corporations. And like corporations, LLCs have to file with the Arizona Corporation Commission.
- Limited partnerships: These partnerships have two kinds of partners, general and limited and offer some protection from liability to limited partners.
- Limited liability partnerships: To protect general partners from liability, a partnership can be registered as a limited liability partnership. This also requires paying a fee to the state.
Register the Business Name
New businesses can register the business name as a trade name (or name you’re doing business as) on the Arizona Secretary of State website. In addition, before beginning operations, most new businesses will have to complete a transaction privilege tax application with the Arizona Department of Revenue.
The transaction privilege tax is analogous to the sales tax in other states. It applies to most but not all businesses. The Arizona Department of Revenue website has information on which businesses will have to pay the transaction privilege tax.
Get Tax ID Numbers
As in all states, new businesses in Arizona must set up tax accounts and obtain tax numbers for both federal and state governments.
Businesses can register on the Internal Revenue Service website to get a federal Employee Identification Number. The EIN let employers withhold taxes on worker wages and salaries and file the business’s federal tax return.
Businesses can register for state taxes at the Arizona Department of Revenue website. The Arizona Commerce Authority Small Business Services website also has information on this topic.
It may also be necessary to register with local governments. The Arizona Commerce Authority has information and local government contacts on its website.
How Businesses Are Taxed
The Tax Foundation lists Arizona as 20th in its ranking of tax friendliness among the 50 states.
Corporations pay a state income tax of 4.9% of taxable income. LLCs, partnerships and sole proprietorships are not taxed directly. The owners pay individual state income taxes on the profits that flow through to them from these business entities. Businesses also pay a state sales tax of 5.6%. Additional sales taxes may be levied by local jurisdictions up to a maximum of 11.2%.
As for individuals, couples and families, Arizona is highly regarded as one of the most tax-friendly states which helps with recruiting talent from out of state.
Obtain Licenses and Permits
Arizona does not have a state business license requirement for every business. However, most cities and towns do require licenses. Rules vary so it is necessary to check with the local government to find out about local licensing requirements.
The state does require licenses and permits for some businesses that are regulated by state agencies. Business One Stop is a state government website with information on state licensing requirements for various enterprises.
The Bottom Line
Arizona’s low rate of unionization is a positive for entrepreneurs while the relatively high costs represent a challenge. It also provides a diverse climate and a strong population. Overall, its strong growth prospects make it a promising state in which to start a business.
Resources for Starting a Small Business
- Many financial advisors specialize in helping small business owners with their financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Picking the best structure for your new business is critical. Check out this helpful summary of tips for making sure your new business is organized for maximum success.
Photo credit: ©iStock.com/Davel5957, ©iStock.com/DenisTangneyJr, ©iStock.com/Bill_Vorasate